Slides Chapter 8 Flashcards
Settlor
The person who creates a trust by making the property transfer which divides title and imposes duties. The settlor may also be called the trustor, the grantor, or the donor
Beneficiary
The person who receives the equitable title to trust property and hence the right to benefit from that property according to the settlor’s instructions. UPC 1-201(3). The beneficiary may also be called the cestui que trust, the donee, or the grantee. A qualified beneficiary is a beneficiary entitled to certain rights and disclosures under the UTC.
Trustee
The person who holds the legal title to trust property and has the fiduciary duty to manage that property according to the settlor’s instructions and applicable trust law.
Principal or Corpus or Res or Estate
The property conveyed in trust form. (Please do not spell this term “p-r-i-n-c-i-p-1-e.”)
Income
The profits or other earnings made by property after it is conveyed in trust form (e.g., the interest on a certificate of deposit or the rent collected from real property).
Merger
When a trustee and the trust’s only beneficiary are the same person, the legal and equitable interests merge and the trust terminates. Merger will occur even though the trust’s purposes have not been accomplished, and even though some or all of the equitable interest(s) of the trustee-beneficiary are subject to a spendthrift restraint. The reason behind merger is that there is no longer a beneficiary to whom the trustee owes a fiduciary duty.
Trust Protector
Originally used in foreign trusts with unknown foreign trustees. Now common. A person named to oversee the trustee and make sure the trust carries on in the way the settlor intended. The protector can be given many additional powers.
Private Express Trusts
A private express trust is a trust created intentionally by the owner of property for private beneficiaries. Most of the trusts we will discuss in this course are private express trusts.
Charitable Trusts
A charitable trust is a trust that has a charitable purpose or a charity as its beneficiary.
Constructive Trusts
A constructive trust is an equitable remedy, not really a trust, created by a court for the limited purpose of getting property to the rightful owner. In essence, the court constructs a trust for the benefit of the rightful owner. It allows the court to transfer title as required by law to the legal owner but direct that the legal owner (e.g. ex-spouse payee of life insurance) hold the property subject to a constructive trust, with the duty to transfer the property to the rightful owner (e.g. secondary or contingent beneficiaries of policy). For that reason, the UTC does not apply to constructive trusts.
Resulting Trusts
The term resulting trust is also an equitable remedy, not really a trust, that is used when an express trust fails because it no longer has a valid purpose. At that time the property returns to settlor or the settlor’s estate. (Think of a resulting trust like a reversionary interest. Since it normally reverts to settlor after his/her death, it tends to benefit settlor’s heirs or beneficiaries.) The UTC does not apply to resulting trusts.
Types of Private Express Trusts
REVOCABLE (default under UTC) and IRREVOCABLE (default under common law)
- If irrevocable, then settlor cannot amend terms or revoke trust even if life’s circumstances or the law change. Similarly, beneficiaries may be stuck with provisions of a revocable trust on the settlor’s death.
INTER VIVOS (terms are usually in a separate trust agreement or declaration) and TESTAMENTARY (terms are embedded in a will)
SELF-TRUSTEED (Declaration of Trust) and 3RD PARTY-TRUSTEED (Trust Agreement or Deed of Trust)
POUR OVER/STANDBY
UTC §402 - REQUIREMENTS FOR CREATION.
(a) A trust is created only if:
(1) the settlor has CAPACTITY to create a trust;
(2) the settlor indicates an INTENT to create the trust;
(3) the trust has a definite BENEFICIARY or is [a charitable trust, or a trust for an animal or noncharitable purpose under Secs. 408 and 409]
(4) the TRUSTEE has duties to perform; and
(5) the same person is not the sole trustee and sole beneficiary [to AVOID MERGER].
Other
TRUST RES
- Where 3rd party is trustee, need effective transfer of property (even $10 bill attached)
However, today one can have a standby trust that is unfunded.
LAWFUL PURPOSE
Valid, Legal Purpose
Rarely a problem so long as not (1) funding an illegal activity, or (2) otherwise against public policy, like encouraging divorce or obtaining unwarranted public benefits.
Greatest concern with trusts is whether the settlor intended to defraud existing creditors by transferring property into a trust or whether doing so had the effect of making the settlor incapable of meeting his/her present obligations. Uniform Fraudulent Conveyances (or Transfer) Act.
- If so, trust is normally deemed to still exist but creditors may attach assets.
Competent Settlor
Different standards
Testamentary trust AND revocable inter vivos trust (per UTC §601) – same as for will drafting: Settlor must:
P- Know the nature and extent of property; O- Understand the natural objects of her bounty; P – Must develop a plan and; I – understand how these all interrelate
Irrevocable Inter Vivos trust:
Competent to enter into K, and
Effect that creating trust will have on future financial security (higher standard)
Intent to Create Trust
Intent must be to presently and unequivocally (i) divide title between legal and beneficial interest, and (ii) create an enforceable fiduciary relationship – in other words, settlor transferred property to the trustee with intent that that person or company hold the property for the benefit of the beneficiaries and with the knowledge that the beneficiaries may enforce their rights against trustee for breaching the fiduciary duty.
Alternatives?
Retain property until death and then testamentary transfer [Palozie ].
Outright [fee simple] gift with or without explanatory or precatory language [Bolinger ].
A promise to make a gift in the future [Hebrew Univ.].
The creation of a power of appointment over the property [Chapter 8].
Compare words like “request,” “hope,” direct,” “wish,” “require,” “in trust,” “trustee”
Admissible evidence –
Trust instrument only or extrinsic evidence also? Significance of ambiguities.
Oral? [Usually allowed unless real estate, then Statute of Frauds]
Writing [Trust Agreement or Declaration of Trust]? Ambiguities?
Trustee
Who can be trustee? Who should be named trustee?
Must there be a third party trustee or can settlor be trustee?
Must trustee affirmatively accept nomination or is acceptance required if nominated? How does trustee accept or decline duties? (Consider discussing this with intended trustee in advance of nominating them in trust agreement.)
What if no one named or trustee does not accept nomination, will it fail?
How is title held?
Alyssa A. DiRusso, Trustee of Al Yankovic Trust dated March 20, 2018
Potential problem with trustee’s creditors if not titled correctly.
How does a trustee resign? Consider trust instrument, common law and UTC 704 and 705 or state statute.
What is a Trust?
It is a legal relationship established for the purpose of holding property that divides ownership between a trustee (legal title) and others (the beneficiaries, who own beneficial title). A trust imposes an enforceable fiduciary obligation on the trustee to act in the best interests of the beneficiaries. The key word here is TRUST.
Compare with corporation – officers and directors manage property for the benefit of and have a fiduciary duty to others, the shareholders
Other fiduciary relationships do not transfer title or split ownership interests – Power of attorney, bailments, agency, guardianship/ conservatorship, etc.
Separate legal entity that must file tax returns (Form 1041) except revocable living trusts (then on Settlor’s 1040)
Corpus (Property or Res): Funding a Trust
We’ve discussed several of the requirements for a valid trust – competent settlor, trustee, valid purpose, and intent. Next is the requirement that a trust must be funded. The property contributed must be more than a mere expectancy.
Can be very minor ($10.00) (more in the nature of a standby trust) or substantial. In some jurisdictions, including UTC states, there can be an unfunded standby trust created inter vivos and funded through pourover will. See Uniform Testamentary Additions to Trusts Act (1991).
Can be money, tangibles, intangibles, tangible personal property or real property, securities, art, house, anything as long as it constitutes a property right.
Titling – some easier than others – car, real estate, etc.
Honorary Trusts/Trust for a Purpose
Honorary Trust
No ascertainable beneficiaries
Cannot outlast the Rule against Perpetuities
Trustee can choose to distribute to settlor’s heirs or beneficiaries (people who would take the settlor’s estate) OR carry out settlor’s wishes for the trust that failed.
Trusts for a Purpose
New under UTC 409
What “purpose” would be sufficient?
Who enforces this sort of trust?
Why did the UTC create this form of trust with no beneficiaries?
Semisecret Trust
Desire to create trust appears on the face of the will
Terms are undisclosed
Extrinsic evidence not needed to prevent unjust enrichment
Devise is unenforceable
Secret Trust
Devise is absolute on the face of the will
Extrinsic evidence necessary to prevent unjust enrichment
Court will impose a constructive trust on promisor
What revocable living trusts do not do?
Do not protect against creditors of settlor, present or future (except for certain later creditors if in a asset protection jurisdiction)
Do not exclude trust assets from inclusion in gross taxable estate (which may not be so bad under “new normal”) or avoid incidence of income taxation being attributed to settlor/grantor
Pros of revocable living trusts
Has the possibility of avoiding probate (and ancillary probate for real property in another state)
Provides for someone to take over management of property in the trust for settlor upon disability or death. Caveat property not in the trust.
Easily amendable testamentary document since most or all of settlor’s assets are included or poured over.
Provides greater privacy about property in estate and plan of distribution
